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The End of Knowing Receipt Robert Chambers*

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The End of Knowing Receipt Robert Chambers* (2016) 2(1) CJCCL 1 The End of Knowing Receipt Robert Chambers* This article addresses the nature of liability for knowing receipt of assets transferred in breach of trust, and argues that it is no different from liability for breach of trust. It arises because the recipient has obtained assets that are held in trust and, after becoming aware of the trust, has failed to perform the basic trust duties to preserve the trust assets and transfer them to the proper trustees. It is not a form of restitution of unjust or wrongful enrichment, so it should not matter whether the assets were received for the recipient’s own benefit. * Professor of Private Law, King’s College London. This paper has a long history. A shorter version was first presented at the Higher Courts Judges Conference in Napier, New Zealand in 2011, and then at the University of Melbourne and University of Western Australia. The present version was recently presented at the National University of Singapore. I am grateful for the kind invitations to present this paper, the helpful comments and questions received, and the delightful and memorable introduction provided by Justice Sir Robert Chambers (1953-2013) when it was first presented. 2 Chambers, The End of Knowing Receipt I. Introduction II. Breach of Trust III. Source of the Knowing Recipient’s Duties IV. Knowledge or Notice V. BONA FIDE Purchase VI. Indefeasibility VII. Beneficial Receipt VIII. Company Assets IX. Unjust Enrichment X. Constructive Trusteeship XI. Conclusion I. Introduction he law regarding personal liability for knowing receipt of assets Ttransferred in breach of trust or fiduciary duty has received an extraordinary amount of academic and judicial attention over the past 30 years.1 Yet despite this flurry of attention (or perhaps because of it), the law in this area remains in a muddled and unsatisfactory state. There are disagreements over the various elements of the cause of action, which stem from a lack of consensus over the basic nature of the liability: is it a form of restitution of benefits received, compensation for losses caused, or something else? Part of the problem is the language used in this area. Words and phrases, such as “the first limb of Barnes v Addy”, “liability to account as a constructive trustee”, or even “knowing receipt” itself, tend to obscure more than they reveal. While complex concepts do require specialist terminology, it is possible to speak plainly in this area and reveal more. A frequently quoted statement of the essential elements of liability 1. The modern interest in the subject can be traced to a series of cases in the 1970s and 1980s in which assets were misappropriated from companies by their directors or officers, and perhaps the longest article ever published in the Law Quarterly Review: Charles Harpum, “The Stranger as Constructive Trustee” (1986) 102 Law Quarterly Review 114-62, 267-91. (2016) 2(1) CJCCL 3 for knowing receipt was by Lord Justice Hoffmann in El Ajou v Dollar Land Holdings:2 This is a claim to enforce a constructive trust on the basis of knowing receipt. For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.3 While succinct, each part of this statement raises questions about the nature and ambit of knowing receipt. What does it mean to “enforce a constructive trust on the basis of knowing receipt”? On what basis does liability arise for “a disposal of [the plaintiff’s] assets in breach of fiduciary duty” if those assets were not held in trust? Why is “beneficial receipt by the defendant” required? What degree of “knowledge on the part of the defendant” will suffice? I must confess that I once believed, as did the late Professor Peter Birks, that liability for knowing receipt was best understood as a form of restitution of unjust enrichment. I was first introduced to the subject as a doctoral student at a seminar at All Souls College in 1992.4 Enthusiasm for an explanation based on unjust enrichment was running high and was persuasively promoted in the writing of Peter Birks and others at the 2. [1994] BCC 143 (CA (Civ)(Eng)). 3. Ibid at 154. Quoted in Bank of Credit and Commerce International (Overseas) Ltd v Akindele, [2001] Ch 437 (CA (Civ)(Eng)) at para 34 [Akindele]; Caltong (Australia) Pty Ltd v Tong Tien See Construction Pte Ltd, [2002] 3 SLR 241 (CA) at para 31; Ultraframe (UK) Ltd v Fielding, [2005] EWHC 1638 (Ch) at para 1478 [Ultraframe]; First Energy Pte Ltd v Creanovate Pte Ltd, [2006] SGHC 240 at para 53; Comboni v Shankar’s Emporium (Pte) Ltd, [2007] SGHC 55 at para 49; Zambia v Meer Care & Desai, [2007] EWHC 952 (Ch) at para 515; OJSC Oil Co Yugraneft v Abramovich, [2008] EWHC 2613 (QB (Comm)) at para 248; Zage v Rasif, [2008] SGHC 244 at para 14; Arthur v A-G Turks & Caicos Islands, [2012] UKPC 30 (T&C) at para 32 [Arthur]; Otkritie International Investment Management Ltd v Urumov, [2014] EWHC 191 (QB (Comm)) at para 81. 4. See Peter Birks, ed, The Frontiers of Liability (Oxford: Oxford University Press, 1994) Part I. 4 Chambers, The End of Knowing Receipt time.5 If based on unjust enrichment, there seemed no good reason to insist on knowledge, notice, or some element of fault on the part of the recipient as a condition of liability. Strict liability coupled with the defence of change of position then seemed both logical and inevitable. Peter later retreated from that position, accepting that liability for knowing receipt was based on fault, but with liability for restitution of unjust enrichment as an added string to the plaintiff’s bow.6 Much of what follows has been said before, although not all in one place. The law in this area is not (or least does not have to be) as complicated as it appears. Some basic principles can be stated, and although some are controversial, they are set out below in the hope that this might help resolve some of the uncertainty and controversy in the area. Perhaps that is too much to expect, but at least it cannot hurt to state things as clearly and simply as possible, and at least hope not muddy the waters any further. Simply stated, liability for knowing receipt is nothing other than liability for breach of trust. It arises because the recipient has obtained assets that are held in trust, and after becoming aware of the trust, has failed to perform the basic trust duties to preserve the trust assets and transfer them to either the beneficiaries or the proper trustees. This requires actual knowledge of the trust or the circumstances giving rise to it. Notice is insufficient. This is not a form of restitution of unjust or wrongful enrichment, so it should not matter whether the assets were received for the recipient’s own benefit. The recipient is an actual trustee and not just being treated as if that was true. This is not a form of accessory or secondary liability. It is fundamentally different from liability for knowingly assisting a breach of trust or fiduciary duty. Liability for knowing receipt depends upon receiving trust assets and holding them in trust. Therefore, if the recipient obtains title free of 5. Ibid. See the following essays in that collection: Peter Birks, “Gifts of Other People’s Money” Ch 31; Charles Harpum, “The Basis of Equitable Liability” Ch 9 at 24-25; William Swadling, “Some Lessons from the Law of Torts” Ch 41. 6. Peter Birks, “Receipt” in Peter Birks & Arianna Pretto, eds, Breach of Trust (Oxford: Hart Publishing, 2002) 213 [Birks & Pretto, Breach of Trust]. (2016) 2(1) CJCCL 5 the trust as a bona fide purchaser or through indefeasibility of registered title, liability for knowing receipt is not possible. Where assets were not held in trust prior to receipt, but were misappropriated from a company in breach of fiduciary duty, liability for knowing receipt is not possible unless a trust arises. None of this precludes the possibility of a separate claim for restitution of unjust enrichment. However, there is no need to recognise a new equitable cause of action to achieve this. The recipient of misappropriated trust funds can be personally liable at common law for restitution of the value of those funds, subject to the defences of bona fide purchase and change of position. II. Breach of Trust The most important contribution to this area of law in recent years is an essay by Professor Charles Mitchell and Dr Stephen Watterson called “Remedies for Knowing Receipt”.7 They demonstrate convincingly that liability for knowing receipt cannot be explained in terms of unjust enrichment, but is the liability for failing to perform a duty to “restore the misapplied trust property”.8 Where I depart from them is in their reluctance to describe this as a breach of trust. This reluctance was not shared by Mr Simon Gardner, who described knowing receipt as “liability for breach of trust”,9 and went on to say: ‘knowing receipt’ is simply the usual liability for failure to preserve trust property, applicable to all trustees, given particular application to those who are trustees because they receive illicitly transferred trust property. The cognisance requirement in ‘knowing receipt’ is no more than a reminder that, before a 7.
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